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June's meeting of the Euro area's leaders was one of the rare summits that produced a concrete breakthrough that was welcomed by most observers as a genuine step forward. The summit statement began with the bold sentence

We affirm that it is imperative to break the vicious circle between banks and sovereigns.

And then asserted that

When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly.

This decision was widely viewed as crucially important for Spain's economic future. With the risk of significant banking recapitalization costs weighing heavily on the market's assessment of Spanish debt sustainability, the announcement was seen as a crucial step by Spain's Eurozone partners towards sharing the risks associated with its banking sector.

Today, in a joint statement, the finance ministers of Germany, Netherlands and Finland have effectively asserted that, despite the bold words of the statement they agreed to in June, Spain will remain caught in a the vicious banking-sovereign circle. The statement articulates some "principles" for how ESM should operate. Two of the principles are particularly important. The first:

the ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities

In other words "if it happened under your watch, it's your problem". Given that by definition all of the banking problems that are afflicting Europe today occurred under national supervision, this statement effectively tells Spain to drop dead.

The second:

direct bank recapitalisation by the ESM should take place based on an approach that adheres to the basic order of first using private capital, then national public capital and only as a last resort the ESM.

German Finance Minister Wolfgang Schauble (L) and the head of the European Financial Stability Facility, Klaus Regling. (Image credit: AFP/Getty Images via @daylife)

This approach suggests that ESM can only invest in banks as a last resort when national public capital cannot be used. In other words, countries need to be effectively bankrupt and locked out of financial markets before ESM can be used. This new "principle" appears to enshrine the vicious circle as official policy rather than get rid of it.

This statement also has bad implications for Ireland. June's summit statement had included a commitment that

The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme.

The Germany-Netherlands-Finland statement now rules out the ESM investing in the banks acquired by the Irish state, thus ruling out relief on half of the costs incurred by Irish taxpayers. This leaves a renegotiation of the infamous Anglo Irish promissory notes with the ECB as Ireland's only possible source of debt relief.

Why are Germany and their allies reversing their earlier willingness to share banking risks with the Eurozone partners? One possible explanation is the law of unintended consequences. Perhaps their attitude now is: "If Mario Draghi is willing to buy lots of Spanish debt, then why should we worry about Spain going bust next year? Let the ECB look after Spain." In the Eurozone, it appears that no good deed goes unpunished.